Cost Concepts & Cost Concepts &

Classifications Classifications
7anches of Accounting 7anches of Accounting
Financial Accounting Financial Accounting
Cost Accounting Cost Accounting
Management Accounting Management Accounting
Concept of Cost Concept of Cost
Cost is defined as the "value of the Cost is defined as the "value of the
sac7ifice made to acqui7e goods/se7vices sac7ifice made to acqui7e goods/se7vices
measu7ed in moneta7 te7ms b the measu7ed in moneta7 te7ms b the
acquisition of assets o7 incu77ence of acquisition of assets o7 incu77ence of
liabilities at the time the benefits a7e liabilities at the time the benefits a7e
acqui7ed. acqui7ed.
Cost Classification Cost Classification
Costs can be classified into following catego7ies Costs can be classified into following catego7ies
acco7ding to: acco7ding to:
Elements of a P7oduct Elements of a P7oduct
Relationship to p7oduction Relationship to p7oduction
Relationship to volume Relationship to volume
Abilit to t7ace Abilit to t7ace
Depa7tment whe7e incu77ed Depa7tment whe7e incu77ed
Functional a7ea/Activities pe7fo7med Functional a7ea/Activities pe7fo7med
Pe7iod Cha7ged to ncome Pe7iod Cha7ged to ncome
Relationship to Planning, Cont7olling and Relationship to Planning, Cont7olling and
Decision making Decision making
Elements of a P7oduct Cost Elements of a P7oduct Cost
Mate7ials Mate7ials
Di7ect Mate7ial Di7ect Mate7ial
ndi7ect Mate7ial ndi7ect Mate7ial
Labou7 Labou7
Di7ect Labou7 Di7ect Labou7
ndi7ect Labou7 ndi7ect Labou7
Facto7 Ove7head Facto7 Ove7head
Relationship to P7oduction Relationship to P7oduction
P7ime Cost includes di7ect mate7ial and P7ime Cost includes di7ect mate7ial and
di7ect labou7 di7ect labou7
Conve7sion Costs include costs conce7ned Conve7sion Costs include costs conce7ned
with t7ansfo7ming di7ect mate7ial into with t7ansfo7ming di7ect mate7ial into
finished goods. These include di7ect finished goods. These include di7ect
labou7 and facto7 ove7head. labou7 and facto7 ove7head.
Relating to Volume Relating to Volume
Va7iable Costs Va7iable Costs
Fixed Costs Fixed Costs
Mixed Costs Mixed Costs
Semi Semi- -Va7iable Costs Va7iable Costs
Step Costs Step Costs
Abilit to T7ace Abilit to T7ace
Di7ect Cost Di7ect Cost
ndi7ect Cost ndi7ect Cost
Dept. Whe7e ncu77ed Dept. Whe7e ncu77ed
P7oduction Dept P7oduction Dept
Se7vice Dept Se7vice Dept
Functional A7eas Functional A7eas
Manufactu7ing Cost Manufactu7ing Cost
Ma7keting Cost Ma7keting Cost
Administ7ative Cost Administ7ative Cost
Financing Cost Financing Cost
Pe7iod Cha7ged to ncome Pe7iod Cha7ged to ncome
P7oduct Costs P7oduct Costs
Pe7iod Costs Pe7iod Costs
Relationship to Planning, Relationship to Planning,
Cont7olling &Decision Making Cont7olling &Decision Making
Standa7d Cost & udgeted Costs Standa7d Cost & udgeted Costs
Cont7ollable and Non Cont7ollable and Non- -Cont7ollable Costs Cont7ollable Costs
Committed and Disc7etiona7 Fixed Costs Committed and Disc7etiona7 Fixed Costs
Relevant and 77elevant Costs Relevant and 77elevant Costs
Diffe7ential Costs Diffe7ential Costs
Oppo7tunit Costs Oppo7tunit Costs
Shut down Costs Shut down Costs
Cost Cent7es Cost Cent7es
A Cost Cent7e ma be defined as a " Location, A Cost Cent7e ma be defined as a " Location,
Pe7son o7 item of equipment( o7 a g7oup of Pe7son o7 item of equipment( o7 a g7oup of
these) fo7 which Costs ma be asce7tained and these) fo7 which Costs ma be asce7tained and
used fo7 the pu7pose of Cost Cont7ol. used fo7 the pu7pose of Cost Cont7ol.
Cost Cent7es can be classified into Cost Cent7es can be classified into
P7oductive, Se7vice and mixed Cost Cent7es P7oductive, Se7vice and mixed Cost Cent7es
Pe7sonal and mpe7sonal Cost Cent7es Pe7sonal and mpe7sonal Cost Cent7es
Ope7ation and P7ocess Cost Cent7es Ope7ation and P7ocess Cost Cent7es
Cost Units Cost Units
A Cost Unit is 'a unit of quantit of p7oduct, A Cost Unit is 'a unit of quantit of p7oduct,
se7vice o7 time in 7elation to which Costs se7vice o7 time in 7elation to which Costs
ma be asce7tained o7 exp7essed' ma be asce7tained o7 exp7essed'
ndust7 Cost Unit ndust7 Cost Unit
Automobile Numbe7 Automobile Numbe7
uilding Sq. Ft. uilding Sq. Ft.
Costing Methods Costing Methods
Job,batch and Cont7act Costing Job,batch and Cont7act Costing
P7ocess Costing P7ocess Costing
Unit/Output Costing Unit/Output Costing
Ope7ating Costing Ope7ating Costing
Costing Techniques Costing Techniques
Unifo7m Costing Unifo7m Costing
Ma7ginal Costing Ma7ginal Costing
Di7ect Costing Di7ect Costing
Abso7ption Costing Abso7ption Costing
Histo7ical Costing Histo7ical Costing
Standa7d Costing Standa7d Costing
Relevant Costs and Relevant Relevant Costs and Relevant
Revenues Revenues
Relevant Costs a7e expected Futu7e Costs and Relevant Costs a7e expected Futu7e Costs and
Relevant Revenues a7e expected futu7e Relevant Revenues a7e expected futu7e
7evenues, that diffe7 among the alte7native 7evenues, that diffe7 among the alte7native
cou7ses of action being conside7ed. Revenues cou7ses of action being conside7ed. Revenues
and costs that a7e not 7elevant a7e said to be and costs that a7e not 7elevant a7e said to be
i77elevant. i77elevant.
The cost and 7evenues to be 7elevant must The cost and 7evenues to be 7elevant must
occu7 in futu7e, and occu7 in futu7e, and
Diffe7 among the alte7native cou7ses of action Diffe7 among the alte7native cou7ses of action
An IIIustration of ReIevance : An IIIustration of ReIevance :
Choosing output IeveIs Choosing output IeveIs
One One Time Time Onl Special O7de7s Onl Special O7de7s
Su7f gea7 manufactu7es qualit beach towels. The plant has a Su7f gea7 manufactu7es qualit beach towels. The plant has a
p7oduction capacit of 48,000 towels pe7 month. Cu77ent monthl p7oduction capacit of 48,000 towels pe7 month. Cu77ent monthl
p7oduction is 30,000 towels. p7oduction is 30,000 towels.
As a 7esult of st7ike at anothe7 towel manufactu7e7, a luxu7 As a 7esult of st7ike at anothe7 towel manufactu7e7, a luxu7
hotel chain offe7s to bu 5,000 towels f7om su7f gea7 @ Rs. 110 pe7 hotel chain offe7s to bu 5,000 towels f7om su7f gea7 @ Rs. 110 pe7
towel. towel.
No futu7e sales to this hotel a7e anticipated in futu7e. Howeve7 as a No futu7e sales to this hotel a7e anticipated in futu7e. Howeve7 as a
7esult of this cont7act, no futu7e inc7ease in fixed manufactu7ing cost 7esult of this cont7act, no futu7e inc7ease in fixed manufactu7ing cost
is expected. Fu7the7 no inc7ease in ma7keting costs will be is expected. Fu7the7 no inc7ease in ma7keting costs will be
necessa7. Accepting this special o7de7 will not alte7 the selling p7ice necessa7. Accepting this special o7de7 will not alte7 the selling p7ice
and quantit of towels sold to existing custome7s. and quantit of towels sold to existing custome7s.
Should the Su7f Should the Su7f- -Gea7 accept the hotel chain's offe7 ? Gea7 accept the hotel chain's offe7 ?
The selling p7ice pe7 unit to existing custome7s is The selling p7ice pe7 unit to existing custome7s is
Rs. 200/ Rs. 200/- - pe7 unit pe7 unit
Va7iable manufactu7ing cost pe7 unit 75.00 Va7iable manufactu7ing cost pe7 unit 75.00
Va7iable Ma7keting cost pe7 unit Va7iable Ma7keting cost pe7 unit 50.00 50.00
ixed Cost ixed Cost
Manufactu7ing Manufactu7ing Rs. 13,50,000 Rs. 13,50,000
Ma7keting Ma7keting Rs. 6,00,000__ Rs. 6,00,000__
Rs. 19,50,000 Rs. 19,50,000
Without Spl. O7de7 With Spl. O7de7
Revenues Revenues 60 60,,00 00,,000 000 65 65,,50 50,,000 000
Loss Loss :: Variable Variable
Costs Costs
37 37,,50 50,,00 00 41 41,,25 25,,000 000
Contribution Contribution
Margin Margin
22 22,,50 50,,000 000 24 24,,25 25,,000 000
Loss Loss :: Fixed Fixed Cost Cost 19 19,,50 50,,000 000 19 19,,50 50,,000 000
Operating Operating Income Income 33,,00 00,,000 000 44,,75 75,,000 000
DiIIerence DiIIerence 11,,75 75,,000 000
ReIevant Amount for 5,000 SpeciaI ReIevant Amount for 5,000 SpeciaI
Order Order
Revenues Revenues Rs. 5,50,000 Rs. 5,50,000
Va7iable Cost Va7iable Cost Rs. 3,75,000 Rs. 3,75,000
Rs. 1,75,000 Rs. 1,75,000
Requi7ements fo7 nstalling a Cost Requi7ements fo7 nstalling a Cost
Accounting Sstem Accounting Sstem
Suitabilit Suitabilit
Simplicit Simplicit
Flexibilit Flexibilit
Economical Economical
Compa7abilit Compa7abilit
Timeliness Timeliness
O7ganisational Set O7ganisational Set- -Up Up
Unifo7mit Unifo7mit
Efficient Mate7ial Cont7ol Sstem Efficient Mate7ial Cont7ol Sstem
Depa7tmentalisation of Expenses Depa7tmentalisation of Expenses
COST SHEET COST SHEET